Grandparents put their two cents – and more – into college fund
For many families, saving for university has become a team effort, and many grandparents aren’t content to sit on the sidelines
By: SIMON AVERY
Date: July 30,2014
With rising tuition costs outpacing inflation today, and family debt reaching perilous levels in many Canadian households, grandparents are stepping up to help college and university students pay the bills.
The average undergraduate tuition bill in Canada last year was $5,772, with service fees adding an additional $817 to the tally, according to Statistics Canada. Add in the price of accommodation, meals, books and other living expenses and the total annual cost for today’s student runs between $16,000 and $20,000 a year, estimates David Trahair, a financial author and CPA who runs his own financial analysis firm in Toronto.
Over the course of a four-year degree, a student is likely to spend between $64,000 and $80,000. Some of that amount may be covered by summer earnings and student loans, but in most cases it also comes out of family savings. Parents are making sacrifices to help pay for their children’s college or university expenses and reduce their indebtedness upon graduation.
A national survey of 604 parents commissioned by the Canadian Alliance of Student Associations found that one-third are dipping into their own retirement savings to help finance their children’s post-secondary education. The survey, conducted by the polling firm Abacus Data, also found that slightly more than one-third of parents reported taking out a loan and 15 per cent said they had or would be remortgaging their home to help cover their children’s education.
The challenge for many Canadian parents is that they are in their peak spending years when the time comes to prepare for their children’s post-secondary education. There are mortgages and retirement plans to feed and the culmination of years of bills related to child upbringing.
“In many cases the RESP [registered education savings plan] gets shoved to the bottom of the heap because there are so many other financial demands,” Mr. Trahair says.
A welcome trend has been the willingness of grandparents to step up with contributions. More than 53 per cent of grandparents are saving, or plan to start saving, to help pay for post-secondary costs, according to a recent U.S. study commissioned by Fidelity Investments.
The median contribution is a hefty $25,000 (U.S.), and 35 per cent of respondents said they expect to pay $50,000 (U.S.) or more. In fact, 15 per cent of the education savings accounts that Fidelity now manages are owned by grandparents, the company says.
Fidelity reported that many grandparents are motivated by feelings of responsibility at a time when tuition costs are rising faster than most other services and in a job market where a post-secondary degree is considered an essential ticket for success.
In most cases, grandparents are not just giving money but also taking an active role in planning for higher education. More than two-thirds of survey respondents (69 per cent) said they have talked to their own children about how the family will pay for it, Fidelity reports. The study, conducted last April by the research firm ORC International, surveyed 1,001 adults with at least one grandchild 18 years of age or younger.
“For many families, saving for college has become a team effort, and many grandparents aren’t content to sit on the sidelines,” said Keith Bernhardt, vice-president of college planning at Fidelity. “Contributions from grandparents – big or small – can add up over time and potentially open up a grandchild’s opportunities when making college decisions.”
In Canada, the main vehicle for financing college or university is the RESP. Savings grow tax-free and benefit from a government grant of up to $500 a year, to a lifetime maximum of $7,200. To receive the full grant each year, investors must make an annual RESP contribution of at least $2,500.
The RESP offers an additional benefit for grandparents wanting to help finance advanced education. Unlike taking money out of a tax-free savings account (TFSA), withdrawing from an RESP is a taxable event.
“The lock-in feature of the RESP is a hugely positive thing,” Mr. Trahair says. “If the grandparents give money directly to the parents, the parents can blow it. But they can’t raid the RESP to take the money out.”
Many baby boomers are deep in debt today and if they receive a lump sum from their parents, that money can disappear very quickly. In this way, the RESP serves as a way to protect grandchildren from a potential lack of spending discipline among their parents, Mr. Trahair says.